Forex Trading The Dow Theory

In 1884 created two medium or sector indices for the New York Stock Exchange, he called Dow Jones Industrial Average index (industrial) and Dow Jones Transport Average (transport sector index). With these indexes, aimed to establish an indicator of economic activity, considering that activity through the development of certain sectors in the stock market. Charles H. Dow argued that the rise in economic activity implies a greater production of industrial companies that increase their profits are increased demand for their actions and consequently their contributions. This expansion has a domino effect to other sectors, where firms start making profits, and also improve their quotes.

Based on these indexes, formulated his theory, which is based around the modern technical analysis and charting course.

The basic tenets of Dow Theory are:

1. The indexes (prices) reflected all. All possible factors affecting the price of the companies listed on the New York Stock Exchange are discounted by these indices, which assess all the news, data and even natural disasters.

2. Markets move by trends. Trends can be upward: when the highs and lows are getting higher. Or bears: when the maximum and minimum are increasingly low. In turn trends can be primary, secondary or tertiary, depending on their length. The phases that characterize the bull and bear markets are as follows:
2.1. - Bull Market
These are the three types of phases:
a. - The Accumulation fore most Phase
Declines occurring in the market, investors sold because economic news is evil. There is a moderate activity timidly beginning to recover.
b. - The recovery or you can say expansion phase
The activity begins with modest progress and will produce a shy rising prices.
c. - The Phase secondary distribution
There are very active in the market. They usually produce advances in prices and trading volume and investors take long positions without hesitation.
2.2. - Bear Market
a. - Phase distribution The final one
It is the last stage of the opposite trend, in this case, the upward trend. The volume is still high, but tends to decrease in their recoveries.
b. - Panic Phase
The selling pressure is much higher than the buyer. Prices drop dramatically and accelerates the downward movement. Bullish side reactions often occur (corrections)
c. - Phase third
Sales continue. The reports are very negative and continuing the general decline in prices, but less violent than in the beginning of the previous phase.

3. xTop of confirmation. To confirm a trend it is necessary that the two indices coincide with the trend, ie the two rates should be rising or falling at a time.

4. Consistent xvolume. If the market is bullish volume increases will increase and decrease in price declines. On the contrary if the trend is down, the volume will be higher in the fall and will be reduced by the increases. Ie the volume accompanying the trend.

5. Just use the closing prices for socks. The Dow Theory only uses the closing prices, regardless of the highs or lows of the session.

6. The trend is in effect until replaced by another opposite trend. Until the two indexes is confirmed, it is considered that the old trend remains in force, despite apparent signs of turnaround. This principle seeks to avoid premature changes of position.

These principles are in full force today, as we have said all the technical analysis and charting is essentially based on the Dow Theory. Today the Dow Jones industrial average, which brings together the 30 largest companies in the United States is the world's best known index and has even created the equivalent in Europe: the Dow Jones Eurostoxx 50, bringing together the 50 European companies the largest capitalization. There are also other minor indices created by Dow Jones among which the DJ Sustainability.


Concept:
The study of past market movements using two-dimensional graphical tools normally price-time to predict future market movements.